'The Best Recovery 2% Inflation Can Buy'

By Matthew O'Brien

This is not what a recovery looks like. This is what stall speed looks like. In other words, a lost decade in the making. (Actually, make that another lost decade in the making).

The chart below compares core PCE inflation with the employment-population ratio since 2010. The former is the Federal Reserve's preferred measure of inflation -- it shows how much more households spend, minus food and gas costs -- and the latter is the percentage of adults with a job. (Note: The left axis shows core PCE inflation; the right axis shows the employment-population ratio).

See the jobs recovery? Try squinting reaaaaaaalllly hard.

Things aren't getting worse, but they aren't getting better either.

But this flat job growth hasn't been flat. It's wiggled plenty on its journey to nowhere. And though it's nowhere near definitive -- and the data is certainly noisy -- it's suggestive that these moves have more or less tracked the moves in core inflation the past few years. It shouldn't surprise us. The economy's big problem is not enough spending, and less inflation means less spending -- which means less employment. The same is true for stocks. David Glasner has shown that the return on the S&P 500 has strongly correlated with inflation expectations since late 2008. In other words, markets are desperate for more spending too.

This is what a recovery with a 2 percent inflation ceiling looks like. And this is what the recovery will look like as long as the Fed fears 3 percent inflation more than it fears 8 percent unemployment. It's why the recovery has had a speed limit -- and why 2012 has felt a lot like 2011, which felt a lot like 2010. As Ryan Avent of The Economist quipped, this is the best recovery that 2 percent inflation can buy.